Today’s supply chains are in turmoil — much of which is caused by the responses of participants in the supply chain to wild swings in demand. The loads on supply chains surge, experience a period of lesser load, and then surge again because the supply chain are systems. This is known as the “bullwhip effect.”

Because today’s supply chains are in a system crisis, “point solutions” such as “pop up” container storage yards, 24/7 container port operations or air freighting will not alone suffice. System crises need system solutions. Managements of companies that understand this phenomenon can take counterintuitive actions that will result in competitive advantage and better supply chain performance than competitors who do little.

The Pandemic-Induced Supply Chain Crisis
The causes of the supply chain crisis of 2021 are well known: The port, rail, and trucking infrastructures were overwhelmed by an extraordinarily huge surge in consumer demand that was drastically suppressed during the 2020 lockdowns aimed at stymieing the spread of Covid-19. Supply chain infrastructures did not have the capacities to manage the surge, and backlogs resulted in delays and shortages.

Real consumer expenditures did plunge because of the early lockdowns, and they then came back dramatically. However, consumer expenditures on goods then largely returned to their pre-lockdown levels and trend line growth. But the bullwhip effect that the pandemic unleashed has persisted and promises to continue for many months — and possibly years.

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The reason is the lockdowns created major disturbances to supply chain systems. Supply chains are systems of interconnected elements, including factories, ships, ports, rails, airfreight, truck, distribution centers, retailers, and consumers. The performance of these systems is the result of demand, capacities, throughput times, variances, inventories, backlogs, information flows, decision frameworks, and so on.

Consider a simple disturbance, say, a decrease in a steady-state demand of 10%. The supply chain system will experience a decrease in the load on the ports, port terminals, and trucking and other elements of the supply chain. However, the supply chain system’s response will not simply be a decline of everything by 10%. At all steps of the supply chain inputs and outputs will oscillate downwards soon after by over 40% for some parts of the system and then increase from peak to trough by more than 60% several months later as elements of the system adjust to the changes in demand as they perceive demand to be.

A disturbance far greater than a 10% decline in demand was inflicted on supply chains by the Covid 19-related lockdowns in 2020. They depressed U.S. consumer expenditures by 18% in less than three months. Managements in many industries initially curtailed the resupplying of their operations. Inventories were depleted as participants cut reordering to limit the anticipated damage. Then the lockdowns were relaxed and expenditures (demand) rebounded from their low by 24% before returning to pre-lockdown levels trend lines.

The oscillations will continue for many months and possibly years, depending on the nature of the disturbance, their frequency, and the responses of elements of the supply chain. Many disturbances can aggravate the load on the ports (and other elements of the supply chain), including weather, strikes, production mishaps, trade barriers, and wars.

What can you do to cope? Bruce Henderson, the founder of the Boston Consulting Group, once said, “You don’t have the be the best. You just have to be better than your competitors.” This applies to supply chain management. Your initiatives do not have to solve the absolute problems of global supply chains; they just have to solve your problems so they are less severe than those of your competitors. Here are some strategies you can employ.

1. Drastically shorten lead and response times.
In an interview with one of us (George), Marc Bitzer, Whirlpool’s chairman and CEO, said it best, “The only safe supply chain is the short one — short in distance and in time.”

Long lead times and slow response times amplify mismatches of supply and demand in the system. Long lead times drive increased order sizes and safety stock, which disconnect supply chains from reality. These mismatches, in turn, fuel the oscillations causing overstocks and stockouts. The cost of overstocks and stockouts will exceed other costs of the supply chain such as air freight, and their reduction will readily pay for the investments described below. Reduce time and delays in your supply chain wherever you can by dramatically increasing the speed and decreasing the variability of everything you do.

Physically shortening your supply chain by “reshoring” (i.e., switching to a domestic supplier from a foreign one) or “near-shoring” (i.e., switching to a supplier in a country that’s closer to your operations or customers than the one you have been using) reduces the time items spend in the supply chain but often takes the longest time to accomplish.

Other ways to radically shorten the time items spend in supply chains include the following:

Remove steps in the supply chain — for example, by eliminating a level of distribution and/or going to direct-to-store or direct-to-consumer shipping
Pay premiums for faster, more reliable service. Options include avoiding the need to unpack and repack containers by contracting for full containers regardless of whether you do fill them; paying “hot hatching fees” so that your containers are loaded last on the ship and then unloaded first; operating your own ships from and to out-of-the-way ports, something Walmart, Target, the Home Depot, Costco, Canadian Tire, and Lidl, a German retailer are doing.
Use airfreight creatively (e.g., employing dedicated planes, flying point to point, avoiding hubs, and flying to and from uncongested airports)
2. Provide each link in the supply chain with better information.
Don’t let the individual elements of the supply chain rely only on the inputs from upstream and downstream steps, which can amplify distortions in the system. Instead, provide all the links in the chain with real time information on demand from end users and synchronize their responses to it. Achieving this synchronization requires collaboration not just with your immediate customers but also with your customers’ customers and possibly their customers as well.

You ultimately might want to harness sophisticated IT (e.g., a smart IT system, artificial intelligence, and a digital twin) to do this, but they can take years to develop and install. In the meantime, you can use people to perform these tasks.

3. Adjust your just-in-time inventory-management system.
The supply chain disruptions of recent years have made many companies doubt the wisdom of adhering to the just-in-time approach to managing inventories in the system and they are contemplating jettisoning it for maintaining “just-in-case” inventories. But doing so is a formula for aggravating supply chain volatility, shortages, and significantly increasing system inventories. Instead, you should refine your just-in-time system and add inventories strategically. Here’s a way to do that.

4. Resist point solutions.
Anticipate that different parts of your functional organizations will try to give you a piecemeal solution — one that might address a particular issue affecting an individual link in the supply chain. But instead of responding to every request, focus on the whole system. In addition, keep in mind that you may need to spend money in one part of your supply chain (even outside of your corporate boundaries) to improve the overall performance of the system. For these reasons, the bullwhip effect challenge is a C-suite issue.